The Society of Pension Professionals has urged policymakers to keep salary sacrifice for pensions unchanged, following speculation that the government could be looking to reform this area.

The SPP has come out strongly against making any changes to salary sacrifice, after HM Revenue and Customs last week published a study by IFF Research into the attitudes of employers towards this practice, sparking fears the government could be looking to tweak it. The research was commissioned in March 2023, but the current government’s employer national insurance hike, in force since April, has made the practice more attractive. For every £100,000 of salary employees sacrifice into their pension, the saving in employer NICs rose to £15,000 in April, according to consultancy Hymans Robertson. 

Through salary sacrifice, pension contributions are taken out of the salary before income tax and national insurance are applied. The pensions tax and NICs break was maintained in April 2017, when it was abolished for benefits in kind.   

The SPP called salary sacrifice arrangements “a well-established and well-functioning feature of the UK pensions landscape”, noting that a third of private sector employers use them, along with many public sector employers.

Steve Hitchiner, chair of the SPP tax group, warned that changing these would disproportionately hit low earners.  

“Many in non-contributory schemes, or schemes where employer contributions start from a higher base, would be better off, whereas those who receive a lower employer contribution and seek to remedy that with a salary sacrifice would be worse off. More often than not, those whose employer contributions start at a lower amount will be moderate and low earners,” Hitchiner argued.   

In addition, pension saving would be disincentivised, he suggested, saying: “Given the reaction to previous national insurance increases, which is what any changes would amount to, the impact on moderate and low earners, and the likely reduction in pension saving, it is clear that policymakers now have a variety of compelling reasons to leave salary sacrifice arrangements as they are.”   

The SPP pointed out that HMRC's research indicates that employers are supportive of salary sacrifice and believe changes would cause confusion. In the research, employers reacted negatively to all three hypothetical changes to salary sacrifice they were asked about, citing additional cost, including potential price rises to make this up, staff morale and staff disengagement with pensions.